Pentagon Withholds 5% of Pratt's F135 Earnings

F-35 engine maker Pratt & Whitney is the latest Pentagon contractor to fall under the scrutiny of contracts auditors, who seem to be exercising a sharpened vigilance over the ability of companies to follow the department's arcane auditing standards.

The Defense Contract Management Agency (DCMA) informed Pratt on Sept. 30 that it will withhold 5% -- the maximum amount allowable under federal regulations -- of all of its billings for the next three lots of F135 engines and a Navy contract related to finding fuel savings for the F-35's propulsion system. The reason is the comapany's inability to comply with the Earned Value Management System (EVMS), a set of protocols used for the Pentagon to oversee the cost, schedule and performance of a contractor's progress on various programs. DCMA audited Pratt in April and has since pulled back the company's certification with the system.

Though some contractors suggest EVMS is arcane, it is the price of admission into a Pentagon program. Noncompliance has its price -- in Pratt's case, 5% of its billings on multiple multi-billion contracts. DCMA slapped F-35 prime contractor Lockheed Martin with a similar payment withhold in 2010; it was reduced to 2% in August owing to progress at the company toward recertification under EVMS.

Pratt was found to have “inadequate compliance with four of 32” EVMS guidelines, according to Matthew Bates, a company spokesman. DCMA’s withhold covers 5% of future billings against the company’s low-rate, initial-production lots 5-8 for the F135 engine and the Navy’s Fuel Burn Reduction (FBR) program. Under the FBR program, the Navy is looking at ways to improve efficiency in the F-35 engine.

F-35 Program Executive Officer USAF Lt. Gen. Christopher Bogdan met with Pratt executives Oct. 4 to discuss the plan to get the company back into compliance, says Joe Dellavedova, a spokesman for the program office. The program office supports the DCMA's withhold as EVMS is "meant to protect taxpayers from over-billing and focuses on the business systems defense companies use to estimate costs for bids; purchase goods from subcontractors; manage property and materials; and track for cost and schedule progress," Dellavedova says.

“Although we have room for improvement, we have demonstrated our commitment to the success of the F135 engine program by taking on 100% of overrun risk on production engines in our last LRIP award (LRIP 5), and did so voluntarily ahead of the government’s requirement to do so,” Bates said in a statement for Aviation Week. LRIP 5 is valued at $1.12 billion for 35 F135 engines, including three spares. The company has a handshake agreement with the F-35 Joint Program Office for LRIP 6, including 38 engines, but has not signed the deal; the price has not been released. Pratt has delivered 107 F135 engines to date.

EVMS decertification is not an indictment of a company’s technology or ability to deliver quality equipment. It does, however, indicate an inability for the Pentagon to certify the data on a company’s progress in executing programs. This means that the data could be flawed.

Pratt is working on four areas to improve its EVMS compliance: updating documentation to better align with process, improving how scheduling tools are managed and integrated, better cost estimating and forecasting and improving planning for work packages. The company has submitted corrective action plans for each to DCMA for approval. Once these corrective action plans are settled on, the company will have a target date to get recertified. “We are committed to having the best earned value management system possible, and to consistently and accurately track performance and execution to our contracts,” Bates says.

Lockheed was decertified for falling short in roughly half of the 32 EVMS guidelines reviewed by DCMA, and DCMA decertified the company after trying for three years to right the problems. They first came to light in 2007. Lockheed Martin and Bell Helicopter were the only two defense contractors to be decertifed for EVMS compliance in the last decade.